A Classical Liberal Blog on Political Science, Economics, Philosophy, Law, and More

Posts Tagged ‘economics’

Well, actually I think the time is well-spent. But it is funny how often economic thinking and concepts directly intrude on my thoughts the older I get and the more time I spend with economists in person and in print. Two cases in point, both related to the concept of opportunity cost:

1. I was stuck at the airport for much of last Saturday and so perused the magazine racks there at some length during breaks from the pain of trying to work in an airport chair. At one point, my eyes wandered over to the newest edition of Psychology Today – a pretty awful magazine – and noticed the front cover advertising an article titled something like: Why Smart People Have Less Sex. I instantly and without really thinking at all said to myself, “Well that must be due to their higher opportunity cost,” before I even processed anything on a more intellectual level or even picked up the magazine. I decided to see if the article did touch on this (obvious) possible explanation and was disappointed during a quick perusal to see it wasn’t really discussed as an alternative in anything more than a cursory fashion.

2. My eldest son was taking forever eating his dinner tonight so I tried to explain to him the concept of opportunity cost. I was tired of just telling him to eat his supper and stop playing with his food, so I thought I’d try to rationalize with him once again. I proceeded to teach him the phrase opportunity cost and how he should think about what fun he was foregoing by taking twice as long to eat as it should even allowing for enjoyable organic family conversation. When I quizzed him about what this all meant, he responded such that he certainly knew what I was talking about. I thought victory was at hand. And then he proceeded to tell me that it was still so much fun to make his pasta into a ski jump – thus handing me a defeat in my quest to get him to eat faster than paint dries. However, I was pleased that his internal economist is working quite well since he seemed to be calculating the trade-offs!

Note: I wrote this post before David Henderson said this earlier in the week about opportunity cost. Worth a look.

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By now, we have all heard the basic argument that a core problem impeding recovery during the 1930s was the uncertainty created by public policy. In Robert Higgs’ words: “the New Deal prolonged the Great Depression by creating an extraordinarily high degree of regime uncertainty in he minds of investor.” New or anticipated taxes and regulations were at the heart of this uncertainty. And as Burton Folsom notes in a recent book: “Roosevelt’s special-interest spending created insatiable demands by almost all groups of voters for special subsidies. That, in itself, created regime uncertainty.” Obviously, the subsidies were used as a tool of coalition building. But at the same time, they created questions for all: “where would the line be drawn? Who would get special taxpayer subsidies and who would not?” (New Deal or Raw Deal, 251).

Things have changed significantly since the 1930s. Government has more than doubled in size relative to GDP and many of the forms of spending that seemed so novel during the New Deal have become a central component of what many consider to be a minimally functional state.

Another thing that has changed: whereas during the 1930s, the pool of investors was largely limited to the wealthy. In the past quarter century, in contrast, a majority of Americans have stepped into the market, often through a 401(k) or an IRA. We became a nation of investors.

To bring things full circle, I turn your attention to a piece by Graham Bowley in today’s NYTimes, “In Striking Shift, Small Investors Flee Stock Market.”

“For a lot of ordinary people, the economic recovery does not feel real,” said Loren Fox, a senior analyst at Strategic Insight, a New York research and data firm. “People are not going to rush toward the stock market on a sustained basis until they feel more confident of employment growth and the sustainability of the economic recovery.”

This trend is being reinforced by baby boomers readjusting their portfolios away from equities and toward bond funds and the loss of real estate value (and hence a loss in the capacity to use the house as an ATM).

For decades, political scientists and economists have spoken of a political business cycle wherein elected officials goose the economy in the months leading up to an election to maximize their votes, leaving the long-term economic fallout until after the election. Now that nearly every man and woman is an investor, things may be more complicated. One must ask whether the efforts to prove that something is being done are convincing voters qua small investors that the future is quite uncertain, thereby having the unintended consequence of prolonging the recession?

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With but a few weeks left in “Recovery Summer,” this past week was not what many would have hoped. On Tuesday, the Federal Reserve’s FOMC announced that “the pace of recovery in output and employment has slowed in recent months” and “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” Conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The market responded to the Fed’s optimistic forecast much as one might have predicted.

The optimism that had pervaded Wall Street only weeks ago has faded quickly. In its place is a growing realization of what many Americans have been feeling in their bones: this is not the economic recovery the nation had hoped for. While the economy is growing again, it is growing too slowly to create many jobs or to increase household incomes. Given the uneven rebound in the United States, and now signs that the world’s other economic engines are slowing, economists say Americans may confront high unemployment and lackluster growth for some time to come.

The Goldman Sachs Group added to the sense of malaise when it informed its clients that there is a 25 to 30 percent chance that the U.S. economy will fall back into recession. (Bloomberg).

But wait…

While things are increasingly dismal in the US, there are rays of hope across the Atlantic…more precisely, in Germany.

As Roddy Thompson reports: “Germany posted Friday its best quarterly growth since reunification.” The growth rate between April and June was 2.2 percent, compared with 0.6 percent in the US. In the words of senior ING economist Carsten Brzeski, Germany is “playing in a league of its own.” By any one’s account, an annualized rate of growth approaching 9 percent is quite impressive. Kay Murchie notes at the Financial Markets blog that the growth in Germany has been largely export driven: “Earlier this week, Germany’s federal statistics office reported exports grew 3.8% in June compared with May. On an annual basis, exports were 29% higher.”

According to the Economist blog, Free Exchange, the surge in exports is only part of the story. Growth must also be attributed “to investment by firms at home looking to upgrade and expand their capital stock to meet that demand.” German firms are not worried by

American complaints that Germany is living off the spending of others and adding little to global demand have much impact. There are some signs that Germany’s recovery is leading to more spending at home. The German statistical office said that consumer spending made a positive contribution to GDP. Some firms are already reporting skill shortages, which ought to be good for jobs, wages and (eventually) consumption. Even so, a more balanced recovery in Germany may yet be thwarted by fragile banks and by the inherent thrift of consumers.

Germany’s impressive growth must come as a surprise to the Obama administration. If you will recall, in the early days of “recovery summer,” the administration chastised the Germans at the G-20 for providing insufficient stimulus to domestic demand and relying too heavily on exports. Chancellor Angela Merkel rejected the administration’s advice. As Marcus Walker and Matthew Karnitschnig (WSJ) reported at the time, Merkel claimed that the core argument “that increased deficit spending promotes growth— doesn’t apply in Germany.”

Continuing to run big deficits could backfire here, she said, because of Germans’ angst over their aging society and rising public debt. Fear that the German welfare state could run out of money leads individuals to save their income as a precaution, she said. If Germany cuts its budget deficit instead, “then the citizen is more willing to spend money,” she said, “because he knows that he can count on the pension, health and elderly-care systems.”

So, lets sort this out: if the government reduces the budget deficit, citizens have greater faith in the future and, as a result, are more willing to spend? Fiscal stability creates a comparable faith for corporations, leading them to invest in their capital stock? And all of this promotes growth?

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The Summer Recovery Tour has just completed its scheduled stop at Yellowstone National Park, as the touching account on the White House Blog informs us.

Meanwhile…

The Beige Book, released yesterday, “underscored the Fed’s view that the recovery, while still moving forward, is progressing at a slower pace than earlier in the year.” (BusinessWeek)

James Bullard, president of the St. Louis Fed, warned yesterday “that the Fed’s current policies were putting the American economy at risk of becoming ‘enmeshed in a Japanese-style deflationary outcome within the next several years.” (NY Times)

If the AP survey of economists is correct, VP Biden may have to extend the tour, since the real recovery summer may be scheduled for 20102011…2015?

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Well, the new jobs numbers were released today: nonfarm payroll employment fell by 125,000 in June. At the same time, the unemployment rate fell from 9.7 to 9.5 percent.

Before the celebrations begin (“Recovery Summer is underway! The unemployment rate fell!”) recall that the rate only reflects those who are in the labor force. According to the Bureau of Labor Statistics, the workforce shrunk by 652,000 between May and June. In other words, 652,000 were sufficiently discouraged to stop searching for a job (to simplify a bit: the denominator is shrinking faster than the numerator).

If the overall picture is grim, it is particularly dismal for African Americans (15.4 percent unemployment) and Hispanics (12.4 percent unemployment).

Senate Republicans have become born again fiscal conservatives on the issue of unemployment, refusing to support an extension of benefits as they depart Washington for an extended July 4th holiday. One wonders if this is a strategic blunder. See Megan McArdle’s recent post on this and the lively comments it generated.

Paul Krugman (New York Times) opines “We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression [following the Panic of 1873] than the much more severe Great Depression.”

The National Journal reports that in public opinion, “the cement is hardening.” Based on its Congressional Connection poll, “the sputtering economy, the unchecked oil spill in the Gulf of Mexico, two wars and a rough-and-tumble campaign season continue to take a toll on the public’s confidence in the government.”

Meanwhile…

As Congress pushes forward with the most significant financial reforms since the Great Depression, Dan Alamariu at Foreign Policy predicts “The reforms currently debated in Congress represent only the opening salvo of a larger reform process that will take years to complete and whose outcome will be both unexpected and more stringent on financials than the currently debated legislation.”

The White House continues to push ahead with discussions on climate change policy with a meeting scheduled for today. The Hill reports: “Tuesday’s meeting with Obama may lay the groundwork for Reid to craft a legislative strategy for trying to get 60 votes this year on an energy and climate plan.”

Although Krugman draws analogies between 2010 and 1933, things feel a bit more like 1937.

Milton Friedman argued in 1953 (and again in 1967) that economic policy differences are rooted primarily in different views about the consequences of those policies — and that these disagreements could largely be eliminated by better positive economics (!). Specifically, he wrote:

I venture the judgment, however, that currently in the Western world, and especially in the United States, differences about economic policy among disinterested citizens derive predominantly from different predictions about the economic consequences of taking action – differences that in principle can be eliminated by the progress of positive economics – rather than from fundamental differences in basic values, differences about which men can ultimately only fight. (1953)

I have been much impressed, in the course of much controversy about issues of economic policy, that most differences in economic policy in the United States do not reflect differences in value judgments, but differences in positive economic analysis. I have found time and again that in mixed company – that is, a company of economists and noneconomists such as is here today – the economists present, although initially one would tend to regard them as covering a wide range of political views, tend to form a coalition vis-a-vis the noneconomists, and, often much to their surprise, to find themselves on the same side. (1967)

This is a highly problematic contention and something that not even his wife Rose was willing to accept. Indeed, she thought nearly the opposite: “I have always been impressed by the ability to predict an economist’s positive views from my knowledge of his political orientation” (1998).*

My view is that values and interests, not scientific understanding, are at the root of most political differences – and this holds for economists as much as for the rest of us. Indeed, even when economists are in agreement on policy despite different political views, this is often because of a commonly shared fundamental agreement on values, namely a generally consequentialist – even utilitarian – ethical framework that itself is exogenous to economics as a science.

It is worth nothing that Milton wavered later in life in his confidence in this earlier view, noting “I am much less confident now that I am right and she [Rose] is wrong than I was more than four decades ago when I wrote the methodology article…” (1998).

* Rose’s view is very, very troubling since it would make scholarship merely an adjunct to politics rather than a neutral scientific enterprise that might or might not have policy implications. (It is worth explicitly pointing out that she implies the causal arrow is going from political orientation to economic view, rather than the other way around).

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